Morgan Stanley, JPMorgan and UBS warn of more pain for lithium stocks

Lithium prices have spiraled to levels not seen since late 2021 amid a faster-than-expected ramp up in supply and concerns over China’s demand for the battery metal.

Lithium carbonate prices in China fell to 166,500 yuan (US$23,130) a tonne last week, down more than 70% from the ~600,000 yuan (US$83,320) a tonne peak in November 2022.

The recent price weakness has been attributed to the lack of restocking activity in China, persistently bearish sentiment and producers offering bigger discounts to long-term customers, according to commodity price reporting agency Fastmarkets.

A slew of bearish lithium notes hit the market overnight, including ones from Morgan Stanley, JPMorgan and UBS. We’ll recap some of the key points and ratings changes below.

Morgan Stanley: “Lithium bears prevailing”

The supply response has come online much faster-than-expected, said Morgan Stanley analysts, which will push the market into both an earlier and longer-than-expected surplus.

“Our strategists see supply rising 29% in ‘24, outpacing demand growth of 18%, driving a 118kt surplus in ‘24,” said Morgan Stanley.

“The market surplus is expected to remain until '28 where our strategists predict a market deficit of 17kt, after which, the deficit is projected to rise to 585kt in '30.”

With this backdrop, the analysts maintained their bearish outlook for lithium. Some of its key stock ratings changes and commentary include:

• Mineral Resources (ASX: MIN): The only Equal-weighted stock in the space due to its “iron ore exposure and valuation support.”
• IGO (ASX: IGO): Currently implies the highest spodumene price. The stock was recently downgraded to Underweight (from Equal-weight).
• Pilbara Minerals (ASX: PLS): Remains a key Underweight pick due to its “significant capex putting pressure on FCF generation (FY24e FCF: -$620m) and “premium valuation of the stock (trading at ~$4.00 vs. our PT: $3.45).”

JPMorgan: “Market surplus arrives earlier than expected”

A modest medium-term supply increase pushes the market into a surplus in 2024-25, according to JPMorgan. “Taking stock of the looser balance going forward, we struggle to see a catalyst for prices to rebound,” they wrote in a note dated October 4.

“Our revised price scenario suggests some equities have further to fall to recalibrate, with most having outperformed the commodity moves this year.”

The key ratings and price changes include:

• Pilbara Minerals (ASX: PLS): Downgraded to Neutral from Overweight; price target cut to $4.50 from $5.70.
• Core Lithium (ASX: CXO): Downgraded to Underweight from Overweight; price target cut to $0.35 from $0.50.
• IGO (ASX: IGO ): Downgraded to Underweight from Neutral; price target cut from $10.40 from $12.80

Surprisingly, given the investment bank’s bearish outlook, analysts remain Overweight on Allkem (ASX: AKE) and Leo Lithium (ASX: LLL) due to valuation support.

UBS: “A kink in the chain”

UBS hosed down near-term lithium price forecasts by 10-30% and cut FY24-26 earnings expectations by 19-57% for a number of lithium stocks under its coverage.

“We are perhaps most concerned with demand expectations out of China being tested against persistent macro weakness,” analysts warned.

“We currently forecast China/Global EV sales growing 20/28% in 2024e but see downside should macro uncertainty (particularly in China) persist.”

The investment bank remains Buy-rated on IGO as Greenbushes was viewed as “still lowest on the cost curve” followed by a Neutral rating on Pilbara Minerals and a Sell rating on Mineral Resources.

This article was originally published on Market Index on Thursday, 5 October 2023.